Relevance of Cost Audit
In the initial years, Cost Audit was taken merely as a tool for ‘price control mechanism’ for
consumer and infrastructure industries in India. The main objective of Cost Audit when statutorily
introduced under the provisions of Companies Act, 1956 was to meet the Government requirements
for regulating the price mechanism in core industries like Cement, Sugar, Textiles and consumer
industries like Vanaspati, Formulations and Automobiles. The objective was to provide an authentic
data to the Government to regulate the demand and supply in the country through a price control
mechanism
The liberalization of the economy and consequential globalization has further enhanced the need
for authentic data. Therefore, the Cost Audit Report Rules have been amended from time to time to
ensure that the comprehensive authentic information is available in the format required. The basic
structure of the cost audit was laid down by the Cost Audit (Report) Rules, 1968 as prescribed under
the relevant provisions of Companies Act, 1956. They were superceded by the Cost Audit (Report)
Rules 1996, which were notifi ed vide GSR 511(E) dated 5.1.1996. These Cost Audit (Report) Rules
1996 were also subsequently superceded by the Cost Audit Report Rules 2001, which were notifi ed
vide GSR 294(E) dated 27.12.2001
The necessity for and utility of properly documented information is more keenly felt now than ever
before. In most parts of the world, free competition co-exists with appropriate rules and regulations
to ensure free trade and absence of unfair practices. Therefore, in the present competitive scenario of
globalization, the Cost Audit Reports have assumed greater importance and signifi cance being the
important source of reliable and authentic feedback to the government and its various departments
and agencies. It may be clarifi ed here that the Cost Audit Reports do not only contain merely the
cost details, but are full of information related to all aspects of business organization which, if
harnessed properly can provide a comprehensive analysis about the company, the industry and the
economy as a whole. The Cost Audit Report serves as an effective tool of information in the hands
of directors on the Board ensuring good corporate governance.
In an environment of increasing foreign trade under WTO regime, dumping of products at very
low prices have become a serious issue in the international trade. This dumping of products, often
well below the cost price, if not properly countered may harm the indigenous industry. The cost
records and the cost audit report play a very critical role in defense of local industry to substantiate
their fair approach against any allegation of dumping. Similarly, when dumping allegations are
levied against the exports by the Indian companies to any foreign company, the Cost Audit Reports
can provide the valuable feedback to protect the interest of Indian companies
The practice of selling below cost to ward off competition attracts the penal provisions of the
Competition Law. This necessitates the availability of authentic cost details of the products
marketed by industry and business houses to determine normative pricing or fair pricing. In fact,
Competition Law to be effective against any anti-competition activity presupposes the availability
of reliable and authentic cost data
The transfer pricing issue has gained considerable momentum in international scenario. Cost
Audit Report Rules 2001 include the provisions to take care of this aspect in right perspective. The
fundamentals of transfer pricing are based on “arm’s length” throughout the world. The cost details
form the very basis of determining arm’s length transfer pricing policy of any country. An audited
cost records and the resultant Cost Audit Report becomes a majorsource of information, which
can be effectively used by both Indirect and Direct Tax Authorities. The Central Excise Authorities
also use Cost Audit Reports for verifying claim of the companies relating to ex-factory prices of the
excisable goods especially in the case of inter-unit transfers
The Tariff Commission relies on authenticity of the cost audit reports and makes use of these
reports extensively in fi xation of tariffs for the products covered under Cost Accounting Records
Rules. The Cost Audit Reports are also made use of by the respective administrative Ministries of
Government of India for fi xation of administrative prices and working out subsidy, etc. Fertilizer
Industry Coordination Committee (FICC) under the Department of Fertilizers and the Directorate
of Sugar under Ministry of Food use Cost Audit Reports extensively in taking decision with
respect to the Industries under their purview. The Cost Audit Reports relating to Bulk Drugs and
Formulations are used by the National Pharmaceutical Pricing Authority for fi xation of prices of
various drugs and formulations covered under the Drug Price Control Order, 1995.
The Cost Audit Reports have great potential in government procurements especially in case of
non-competitive procurements. There are no effective anti-trust laws in India. This always leaves
a scope for the traders/suppliers to charge exorbitant prices from the government supplies. For
example, ‘Clayton Act’ in USA clearly provides that any discrimination in price, services or facilities
shall be unlawful in USA. It also prohibits the discrimination in rebates, discounts or underselling
in particular localities. This ‘Act’ further provides that any differential in prices etc., shall have
to be justifi ed on the grounds of differences in the cost of manufacture, sale or delivery resulting
from the differing methods or quantities in which such commodities are sold or delivered and the
burden of rebutting the prima-facie case shall be upon the person charged with a violation of this
act. The ‘Clayton Act’ also provides that it shall be unlawful for any person to induce or receive a
discrimination in price, which is prohibited under the act. In other words, each seller of product or
service can charge a uniform price only in the USA. However, this is not the case in India, where
each purchaser may be charged a differential price by the supplier or the trader. A signifi cant
portion of the government budget is spent every year on procurements, where reasonability of
purchase price is always an issue. Therefore, Cost Audit Reports can always fi ll the vacuum in
government procurements ensuring reasonability of prices. Similarly in USA, an “Incurred Cost”
statement is made with respect to major projects funded out of Government budgets. This incurred
cost is nothing but Cost Audit Report.
In addition to above, Government has been giving various incentives for exports by the Indian
Industries. These incentives are mainly to refund the taxes paid in the country to provide level
playing fi eld to the Indian Industry. Similarly many of the exporters import duty - free material
for exports after further processing, where actual productivity is a major issue. Cost Audit Reports
provide not only the actual amount of various taxes paid by any unit but also provide the actual
productivity and wastage. Thus Cost Audit Reports can benefi t the Indian Industry to get at par
with global competitors.
In the initial years, Cost Audit was taken merely as a tool for ‘price control mechanism’ for
consumer and infrastructure industries in India. The main objective of Cost Audit when statutorily
introduced under the provisions of Companies Act, 1956 was to meet the Government requirements
for regulating the price mechanism in core industries like Cement, Sugar, Textiles and consumer
industries like Vanaspati, Formulations and Automobiles. The objective was to provide an authentic
data to the Government to regulate the demand and supply in the country through a price control
mechanism
The liberalization of the economy and consequential globalization has further enhanced the need
for authentic data. Therefore, the Cost Audit Report Rules have been amended from time to time to
ensure that the comprehensive authentic information is available in the format required. The basic
structure of the cost audit was laid down by the Cost Audit (Report) Rules, 1968 as prescribed under
the relevant provisions of Companies Act, 1956. They were superceded by the Cost Audit (Report)
Rules 1996, which were notifi ed vide GSR 511(E) dated 5.1.1996. These Cost Audit (Report) Rules
1996 were also subsequently superceded by the Cost Audit Report Rules 2001, which were notifi ed
vide GSR 294(E) dated 27.12.2001
The necessity for and utility of properly documented information is more keenly felt now than ever
before. In most parts of the world, free competition co-exists with appropriate rules and regulations
to ensure free trade and absence of unfair practices. Therefore, in the present competitive scenario of
globalization, the Cost Audit Reports have assumed greater importance and signifi cance being the
important source of reliable and authentic feedback to the government and its various departments
and agencies. It may be clarifi ed here that the Cost Audit Reports do not only contain merely the
cost details, but are full of information related to all aspects of business organization which, if
harnessed properly can provide a comprehensive analysis about the company, the industry and the
economy as a whole. The Cost Audit Report serves as an effective tool of information in the hands
of directors on the Board ensuring good corporate governance.
In an environment of increasing foreign trade under WTO regime, dumping of products at very
low prices have become a serious issue in the international trade. This dumping of products, often
well below the cost price, if not properly countered may harm the indigenous industry. The cost
records and the cost audit report play a very critical role in defense of local industry to substantiate
their fair approach against any allegation of dumping. Similarly, when dumping allegations are
levied against the exports by the Indian companies to any foreign company, the Cost Audit Reports
can provide the valuable feedback to protect the interest of Indian companies
The practice of selling below cost to ward off competition attracts the penal provisions of the
Competition Law. This necessitates the availability of authentic cost details of the products
marketed by industry and business houses to determine normative pricing or fair pricing. In fact,
Competition Law to be effective against any anti-competition activity presupposes the availability
of reliable and authentic cost data
The transfer pricing issue has gained considerable momentum in international scenario. Cost
Audit Report Rules 2001 include the provisions to take care of this aspect in right perspective. The
fundamentals of transfer pricing are based on “arm’s length” throughout the world. The cost details
form the very basis of determining arm’s length transfer pricing policy of any country. An audited
cost records and the resultant Cost Audit Report becomes a majorsource of information, which
can be effectively used by both Indirect and Direct Tax Authorities. The Central Excise Authorities
also use Cost Audit Reports for verifying claim of the companies relating to ex-factory prices of the
excisable goods especially in the case of inter-unit transfers
The Tariff Commission relies on authenticity of the cost audit reports and makes use of these
reports extensively in fi xation of tariffs for the products covered under Cost Accounting Records
Rules. The Cost Audit Reports are also made use of by the respective administrative Ministries of
Government of India for fi xation of administrative prices and working out subsidy, etc. Fertilizer
Industry Coordination Committee (FICC) under the Department of Fertilizers and the Directorate
of Sugar under Ministry of Food use Cost Audit Reports extensively in taking decision with
respect to the Industries under their purview. The Cost Audit Reports relating to Bulk Drugs and
Formulations are used by the National Pharmaceutical Pricing Authority for fi xation of prices of
various drugs and formulations covered under the Drug Price Control Order, 1995.
The Cost Audit Reports have great potential in government procurements especially in case of
non-competitive procurements. There are no effective anti-trust laws in India. This always leaves
a scope for the traders/suppliers to charge exorbitant prices from the government supplies. For
example, ‘Clayton Act’ in USA clearly provides that any discrimination in price, services or facilities
shall be unlawful in USA. It also prohibits the discrimination in rebates, discounts or underselling
in particular localities. This ‘Act’ further provides that any differential in prices etc., shall have
to be justifi ed on the grounds of differences in the cost of manufacture, sale or delivery resulting
from the differing methods or quantities in which such commodities are sold or delivered and the
burden of rebutting the prima-facie case shall be upon the person charged with a violation of this
act. The ‘Clayton Act’ also provides that it shall be unlawful for any person to induce or receive a
discrimination in price, which is prohibited under the act. In other words, each seller of product or
service can charge a uniform price only in the USA. However, this is not the case in India, where
each purchaser may be charged a differential price by the supplier or the trader. A signifi cant
portion of the government budget is spent every year on procurements, where reasonability of
purchase price is always an issue. Therefore, Cost Audit Reports can always fi ll the vacuum in
government procurements ensuring reasonability of prices. Similarly in USA, an “Incurred Cost”
statement is made with respect to major projects funded out of Government budgets. This incurred
cost is nothing but Cost Audit Report.
In addition to above, Government has been giving various incentives for exports by the Indian
Industries. These incentives are mainly to refund the taxes paid in the country to provide level
playing fi eld to the Indian Industry. Similarly many of the exporters import duty - free material
for exports after further processing, where actual productivity is a major issue. Cost Audit Reports
provide not only the actual amount of various taxes paid by any unit but also provide the actual
productivity and wastage. Thus Cost Audit Reports can benefi t the Indian Industry to get at par
with global competitors.
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